Income and Expenditure Account (I&E A/c, hereafter) is prepared with the help of the Receipts and Payments Account that is given to us in a question. It is prepared by following the rule of Nominal Account i.e. debit all the expenses and losses; credit all the incomes and gains. In order to prepare I&E A/c from a given R&P A/c, we transfer all the expenses (only of revenue nature) from the ‘Payments’ side of the R&P A/c to the ‘Expenditure’ side (or the Debit side). On the other hand, we transfer all the incomes (only of revenue nature) from the ‘Receipts’ side of the R&P A/c to the ‘Income’ side (or the Credit side) of I&E A/c.
Important Points to be Noted
- I&E A/c records only revenue nature transactions.
- It is prepared on an accrual basis of accounting. That means, all the transactions related to the current year are recorded in this account.
- All the revenue expenses of the current year whether paid or not are recorded on the Expenditure side of this account.
- All the revenue incomes of the current year whether received or not are recorded on the Income side of this account.
- Revenue expenses that are paid in advance and revenue incomes that are received in advance during the year are not recorded in this account.
- Lastly, non-cash transactions such as depreciation, profit or loss on sale of fixed assets, etc. are also recorded in this account.
Features of Income and Expenditure Account
The following are the various features of Income and Expenditure Account.
Nature of Account: It is a Nominal Account in nature. The debit side (i.e. expenditure side) of this account records all expenses and losses and the credit side (i.e. income side) records all incomes and gains.
Basis of Preparation: It is prepared with the help of the Receipts and Payments Account. All the revenue incomes and expenses are transferred from R&P A/c to this account.
Records Only Current Year’s Items: It records only those transactions that are related to the current accounting
period. In other words, transactions related to the previous or next year are excluded even if these transactions took
place in the current accounting period.
Ignores Capital Nature Transaction: It does not record the transactions which are capital in nature such as the purchase of fixed assets. Only revenue-nature transactions are recorded in this account. For example, if an asset is sold, then only profit or loss on such sale (if any) will be recorded in I&E A/c and not the total amount of sale as it’s a capital receipt.
Adjustments: The various cash and non-cash transactions such as outstanding expenses, accrued income, prepaid expenses, income received in advance, depreciation, etc. are considered while preparing this account.
Akin to Profit and Loss Account: It is similar to Profit and Loss Account in the sense that while the former is prepared to ascertain surplus or deficit during an accounting period the latter is prepared to ascertain net profit or loss during an accounting period.
Balancing Figure: The balancing figure of this account is expressed in terms of either surplus (i.e. excess of income over expenditure) or deficit (i.e. excess of expenditure over income).
“Income and Expenditure Account is akin to Profit and Loss Account” Why?
Income and Expenditure Account (I&E A/c) is similar to the Profit and Loss Account (P&L A/c) in the sense that the former is prepared by the Not-for -Profit-Organisations and the latter is prepared by the Profit-making Organisations. Both the accounts are prepared on the accrual basis of accounting.
Similar to the P&L A/c, all the expenses and losses pertaining to the current accounting period are recorded on the Expenditure side (debit side) and all the gains and income of the current accounting period are recorded on the Income side (credit side) of the I&E A/c. The balancing figure of the I&E A/c is surplus or deficit and that of the P&L A/c is the net profit or a net loss. Both the accounts record only revenue items that are related to the current accounting period.
Similarities between Income and Expenditure Account and Profit and Loss Account
Income and Expenditure Account of an NPO is akin to the Profit and Loss Account of a profit earning business in the following manners.
Nature of Account: Both the concerned accounts are nominal in nature.
Basis of Recording: Both the accounts record only revenue expenses and revenue incomes related to the current accounting period. The items of capital nature are ignored while preparing these accounts.
Period: Transactions related to the current year are recorded in the Income and Expenditure account in the same manner in which the Profit and Loss Account is prepared. Transactions related to the previous year or next year are excluded.
Adjustments: The treatment of adjustments such as outstanding expenses, prepaid expenses, income received in advance, income due but not received, depreciation, bad debts, etc. is the same as that in case of Profit and Loss Account. Thus, both accounts are prepared on an accrual basis.
Steps to Prepare Income and Expenditure Account
The given below are various steps to prepare an Income and Expenditure Account (I&E A/c).
Step 1: Firstly, transfer all the revenue expenses of the current year from the Payments Side of R&P A/c to the Expenditure Side (i.e. Debit side) of I&E A/c.
Step 2: Similarly, transfer all the revenue incomes of the current year from the Receipts Side of R&P A/c to the Income Side (i.e. Credit side) of I&E A/c.
Step 3: Then, we adjust the outstanding and the prepaid expenses for the current year to the concerned expenses (that we have recorded in Step 1).
Step 4: Similarly, adjust the accrued income and the income received in advance of the current year to the concerned income (that we have recorded in Step 3).
Step 5: Now, we show the non-cash payments such as depreciation, loss on sale of an asset, etc. on the Expenditure Side (i.e. Debit side) of I&E A/c.
Step 6: Next, all the non-cash receipts, for example, profit on the sale of assets are recorded on the Income Side (i.e. Credit side) of I&E A/c.
Step 7: Lastly, we tally both sides. If the total of the Income Side (or the Credit side) is more than the total of the Expenditure side (or the Debit side), then the balancing figure is regarded as Surplus. On the other hand, if the total of the Income Side (or the Credit side) is less than that of the Expenditure side (or Debit side), then the balancing figure is considered as Deficit.
Also, Read
Interest on Capital
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Interest on Drawings
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
What is Operating Profit?
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
Balance Sheet
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
Profit and Loss Account
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.